Running Head: FINANCIAL RESOURCES

Managing Financial Resources and Decisions

[Name of the Writer]
[Name of the Institute]
[Date]

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Table of Contents

1.

Task 1........................................................................................................................................1
1.1.

Different Sources of Finance............................................................................................1

1.1.1.

Internal Sources of Finance.......................................................................................1

1.1.1.1. Retained Profits.......................................................................................................1

1.1.1.2. Share Capital............................................................................................................1
1.1.2.

External Sources of Finance......................................................................................2

1.1.2.1. Ordinary Shares.......................................................................................................2

1.1.2.2. Finance Lease..........................................................................................................2
1.1.2.3. Operating Lease.......................................................................................................2
1.2.

Implications of Different Sources of Finance...................................................................2

1.3.

Appropriate Sources of finance for Green Supplies Ltd...................................................3

1.3.1.

Retained Profits.........................................................................................................3

1.3.2.

Ordinary Shares.........................................................................................................4

1.3.3.

Finance Lease............................................................................................................4

1.4.
2.

3.

Task 2........................................................................................................................................6
2.1.

Importance of Financial Planning for Green Supplies Ltd...............................................6

2.2.

Information for Decision Makers of Organisation............................................................6

2.3.

Impact of Loan and Equity Finances or Investment on Financial Statements..................7

Task 3........................................................................................................................................8
3.1.

Prepare the Cash Budget for Four Months Ending September 2015................................8

3.2.

Calculation of Selling Price Per Unit................................................................................8

3.2.1.

33% Mark Up on Cost and profits on 500 Units Sold...............................................8

3.2.2.

30% Mark Up on Cost after First 500 Units Sold & Sale Profit on Additional 1000

units

3.3.
4.

Costs of Chosen Sources of Finance for Green Supplies Ltd...........................................5

Viability of Project Using Investment Appraisal Techniques.........................................10

Task 4......................................................................................................................................12
4.1.

Main Financial Statements Produced by a Business.......................................................12

4.2.

Comparison of Appropriate Formats of Financial Statements........................................12

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4.3.

Interpretation of Financial Statements Using Appropriate Financial Ratios..................13

4.3.1.

For Whole Sale Business.........................................................................................13

4.3.2.

For Retail Business..................................................................................................14

References......................................................................................................................................16

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Managing Financial Resources and Decisions

1. Task 1

1.1. Different Sources of Finance

Business finances can be explained as the capital required for expanding a business.
There are two viable sources available for any business i.e. internal (financing from inside) and
external (financing from outside the business) (Lusardi & Mitchell, 2013, p. 2).

1.1.1. Internal Sources of Finance

1.1.1.1. Retained Profits
Companies can raise funds by retaining the profit from business activities and not using it
to pay dividends to the shareholders. In return shareholders of the organisation are assured that
retained profits are being invested at a competitive rate of return. Most of the business
organisations retain their 50 % of profits for further expansion.

1.1.1.2. Share Capital

More funds can be generated if the founders of organisation are interested in investing
more to the share capital of the company. The founders providing the share capital of the
organisation has complete right over the business activities. Once the investment is made,
shareholder will get return on the investment in the form of dividends (Norvaiien,
Stankeviien & Kruinskas, 2015, p. 5).

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1.1.2. External Sources of Finance

1.1.2.1. Ordinary Shares
This method is used to generate funds by selling stocks of the business. Ordinary
shareholders have the right to voice any decision that is made by the organisation. However,
ordinary shareholders are not payed fixed amount of dividends.

1.1.2.2. Finance Lease

In this mode of financing, a financial institution is involved to lease the desired asset to
the company. The lease amount is paid to the financer in the form of rental payments. This
method is an alternate way to large cash outflows for an outright purchase of an asset. In this
case, the risks are associated with the lessee.

1.1.2.3. Operating Lease

This method is also similar to finance lease, as in this case, the reward and the risk
involved in operating lease are limited to the owner. Operating lease is awarded without any
credit checks; however, assets are considered as a form of security. Assets can be leased multiple
times as the operating lease is based on a short period of time (Tarca, Morris & Moy, 2013, p.
74).

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1.2. Implications of Different Sources of Finance

Generating funds for business expansion and issuing additional stocks can dilute the
ownership of the founders and existing shareholders. For example, if a company issues 100,000
shares and an investor owns 1,000 shares, the investor owns 0.01 or 1% of the company.
Similarly, if the company decides to issue additional 30,000 shares, the ownership is reduced to
0.00769 or 0.76% of the company. Publicly traded companies face pressure from shareholder for
changing the board of directors, if the company is not performing up to the standard
(Chesbrough, 2012, p. 2).
In the past, debt financing from financial institutions was only offered to large
organisations that maintained substantial revenues and assets. Now, the case is different and this
option is available to small companies as well. Companies are required maintain liquidity after
filing for funds from financial institution. If the company goes bankrupt, it will be liable to pay
for the employees and the suppliers for new inventory. All the assets will be confiscated by the
court and the organisation must wait for forty five days in order to sell to commercial or
government customers and get the invoices paid. Invoice factoring is a viable source to maintain
accounts receivable and keep the company operations navigating during bankruptcy process.
This will be a substantial source to keep up with the expenses of paying the employees and
vendors (Leitmann, 2013, p. 3).

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1.3. Appropriate Sources of finance for Green Supplies Ltd.

Business requires funds to continue operations and implement new strategic expansion
plans. Green Supplies Ltd. can use following three sources to finance the expansion process of
business:

1.3.1. Retained Profits

Retained earnings are the amount left from revenue after taxes and dividends being paid.
In this case company gets to use this money for the expansion process or to pay off the liabilities.
Few advantages of retained earnings are getting higher returns for the shareholders equity and
availability of capital for growth. Some disadvantages of this method include non-payment of
dividends to shareholder and the Green Supplies Ltd will owe more in form of income taxes.

1.3.2. Ordinary Shares

Among many other options, Green Supplies Ltd can consider issuing shares to private
investors. Issuance of shares to private investor comes with advantages and few disadvantages.
This method will generate funds to the organisation but comes with dilution of the ownership.
Shareholders will expect a higher return on their investment, and rights to change the directors.
However, the company obtaining funds from issuance of ordinary shares can repurchase all of its
outstanding shares when it has no need of equity capital. This will consolidate the ownership and
eliminate the need of generating funds from shareholder (Gitman, Joehnk & Billingsley, 2013, p.
8).

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1.3.3. Finance Lease

The biggest advantage for Green Supplies Ltd using finance lease will be spreading out
of cash flows over several years for the purchase of an asset. Likewise, the ownership of the
asset remains with the lessor and lessee is required to pay rental payments only, this way a
company can purchase any quality asset which it cannot afford. However, disadvantages related
to finance lease are the expenses in the form of rental payment, rather than as equity payments.
The lessee will not benefit from any appreciation in the value of the land, and the lease payments
become a burden as it is fixed for a very long period of time (Lin & Paravisini, 2013, p. 229).

1.4. Costs of Chosen Sources of Finance for Green Supplies Ltd

In balance sheet the accounts for the issuance of stock, involves cash, common stock and
paid in capital accounts. Credit paid in capital is the difference between the issuance and par
value of the issued stock. To illustrate, if Green supplies Ltd. decides to issue an additional 1,000
shares of common stock with a face value of 30 cents and the issuing price is $10, the cash
proceeds will be 1,000 multiplied by $10 and the paid up capital / share will be $10 less 30 cents
i.e. $9.70.

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2. Task 2

2.1. Importance of Financial Planning for Green Supplies Ltd

Establishing a business plan before starting a business is a valuable process for the
owners. This process helps in guiding the day to day business decisions and budgeting process.
Financial planning helps deciding the progress of company by evaluating the forecasted numbers
with actual yields. Even a sole proprietorship business requires a financial plan before continuing
business activities. In case of Green Supplies Ltd, business owner needs to make decision
regarding sources of finance; therefore, it is necessary for the management to spot previous
business trends about allocating their resources efficiently (Ak et.al, 2013, p. 553).
Green supplies Ltd. also needs to limit their expenses by prioritising their important
expenditures. Financial planning is also important for Green supplies Ltd. because this represents
whether the company is achieving their desired targets and with adequate cash balance. This will
help the management of Green Supplies Ltd. to see the clarity of hard data, about the business
being on its way to success.

2.2. Information for Decision Makers of Organisation

Decision making in an organisation is required at all levels. This process requires
involvement of every individual in the organisation. Depending on the type of problem, different
decision making techniques should be taken under consideration. The first process is to identify
the problem at hand and the leader of the organisation should evaluate all the possible solutions
of this problem with employees. Multiple perspective analysis is sometime considered best

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option because the CEO or manager of the organisation can force themselves to think outside the
box about the problem (Ak et.al, 2013, p. 553).
Another important decision method involves short term decisions or operational
decisions. This involves instant solution of the problem through the action of the employees. In
case of Green Supplies Ltd, they could only use a particular delivery service to deliver their
finished goods. Lastly, following up and feedback about the problem is necessary and it is the
duty of the manager to make sure that targets of the organisation are met appropriately. Leaders
of the organisation should be involved in implementing any decision that is important for the
progress of company, which will help in assessing the future decisions (Engel, Fischer &
Galetovic, 2013, p. 83).

2.3. Impact of Loan and Equity Finances or Investment on Financial

Statements
The amount of loan and equity finances has a significant impact on the several
components of companys balance sheet. If an organisation uses equity financing mode to
finance its operation, there will a positive change in the cash flows from financing activities and
balance sheet component will rise due to common stock par value. If a firm raises the funds
through debt financing, there will be an increase in the liability portion of the balance sheet and a
positive item in the cash flow statement. If a firm increase debt financing, leverage ratios, like
debt to equity and debt to capital, will also rise. This will require the company to maintain certain
interest coverage in the event of liquidation (Gitman, Joehnk & Billingsley, 2013, p. 9).

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Equity financing affects the balance sheet liability portion, and if the company maintains
high debt to asset ratio, lenders might be concerned about investing in the organisation. In case
of debt to income ratio, lower ratio means that company is performing well and the liabilities are
less than the intangible assets. Higher ratio means company is at a risk of being dissolved by the
creditors.
3. Task 3

3.1. Prepare the Cash Budget for Four Months Ending September 2015

Beginning Cash
Sources of Cash
Cash Sales
A/c Receivable
Asset Sales
Total Cash
Use of Cash
Purchases
Expenses
Rent
Bank loan
Payments
Total Use of cash
Surplus / Deficit

15-Jun
50,000

15-Jul
247,000

15-Aug
444,000

15-Sep
769,000

45,000
750,000

50,000
812,000

65,000
970,000

82,000
910,000

845,000

1,109,000

1,479,000

1,761,000

486,000
82,000
10,000

562,000
83,000

596,000
94,000

640,000
110,000
10,000

20,000
598,000
247,000

20,000
665,000
444,000

20,000
710,000
769,000

20,000
780,000
981,000

From the above table it can be observed that Green Supplies Ltd is in constant surplus,
which represent good financial health of the organisation. However, Green Supplies Ltd must
consider paying down the purchase debt from the cash surplus. Another important aspect for
utilising the cash surplus is to invest the cash in the highest interest rate yielding investments.
For this purpose Green Supplies Ltd must consider risk, liquidity and maturity of that
investment. Advantage of maintaining the cash flow is to understand the future cash needs of the

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business. This will also help the Green Supplies Ltd to finance internally its expansion plan and
not rely on external financing.

3.2. Calculation of Selling Price Per Unit

3.2.1. 33% Mark Up on Cost and profits on 500 Units Sold
Selling Price - cost = gross margin
SP- 300 = 33% of SP
SP (1 - 0.33) = 300
SP = 300 / 0.67
SP = 447.76
Cost of 500 Units = 300 * 500
= 150,000.
SP of 500 units = 447.76 * 500
= 22, 3880
Profit on 500 units sold = 22, 3880 150,000
Profit on 500 units sold = 73, 880

3.2.2. 30% Mark Up on Cost after First 500 Units Sold & Sale Profit on Additional 1000 units
Selling Price cost = gross margin
SP 300 = 30% of SP
SP (1 0.3) = 300
SP = 300 / 0.7
SP = 428.57

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Cost of 1000 units = 300 * 1,000

= 300, 000
SP of 1000 units = 428.57 * 1, 000
= 428, 570
Profit on 1000 units sold = 428, 570 300,000
Profit on 1000 units sold = 128, 570.

3.3. Viability of Project Using Investment Appraisal Techniques

Payback Period = Initial Investment / Cash Inflow per period

By using the method of payback calculation, cash flows are used to calculate how fast
Day choice ltd will recover its cash investment. Project A requires an initial investment of 150,
000 and the payback period for Project A is 3.2 years, while project B investment is 175, 000
payback period is 3.1 year. Project C initial investment is 160, 000 payback period is 3.3
years.
With a discount rate of 10% and a span of 4 years, projected cash flows for Project A are
worth 157,581.45, which is greater than the initial 150,000 paid. The resulting positive NPV of

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the above project is 7,581.45, which indicates that pursuing the project A, may be optimal.
While Project B is worth 174,342.60 today, this is less than the initial investment. The
resulting NPV of the above project is -657.40, which means the project B may not be an
optimal decision. In Project C projected cash flows are worth 143,994.95 today, which is less
than the initial 160,000. The resulting NPV of project C is -16,005.05, which means the
above project may not be an optimal decision.
From the above analysis it can be concluded that NPV is more effective process to
evaluate the projects. Discounted cash flow analysis is used in NPV tool which is more effective
to compensate for the future cash flows (Ak et.al, 2013, p. 553).

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4. Task 4

4.1. Main Financial Statements Produced by a Business

There are four main financial statements that must be produced by a small business. This
includes income statement, cash flow statement, balance sheet and the statement of owners
equity. These statements are helpful in compiling financial records and analyse the past financial
performance and industry average (Lusardi & Mitchell, 2013, p. 4). Each of these financial
statements is helpful in understanding the financial health of the business and all these statements
are studied together. Individual analysis of each statement identifies the weakness and potential
problems of the organisation.

4.2. Comparison of Appropriate Formats of Financial Statements

Income statement for sole trader is comparatively different from the publicly traded
organisation. In publicly traded organisations, income statement starts with gross income amount
that is calculated using revenue followed by the deduction of cost of goods sold. In second part
of income statement, operating income is calculated using gross income minus all expenses
incurred, which reveals the operating income (Chesbrough, 2012, p. 3). The last part of the
income statement is related to interest expense and taxes to calculate the net income of the
business.
For sole traded organisation balance sheet is very simple that show the assets, liabilities
and shareholder equity. However, a publicly traded companys balance sheet breaks down into

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current and long term assets, which refer to the assets that can be quickly converted into cash and
long term assets that will take longer to liquidate. This is followed by current liability and long
term liabilities. Long term liabilities that are due for more than a year and current liabilities are
due within the next year from the date of balance sheet.

4.3. Interpretation of Financial Statements Using Appropriate Financial

Ratios

4.3.1. For Whole Sale Business

Gross profit margin = (Revenue COGS) / Revenue
= (580,000 430,000) / 580,000
= 0.258

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Net profit Margin = (Net profit / Net Sales) * 100

= (85,000 / 580, 000) * 100
= 14.65 %
Current Ratio = Current asset / Current Liability
= 2510 / 1550
= 1.619
Quick ratio = (current assets inventories) / current liabilities
= (2510 1420) / 1550
= 0.703
From the above analysis of Whole sale business it can be observed that gross profit
margin is 0.258 or 25.8%, which means that for every 1 the company will earn 0.25 at the end.
From the net profit margin it can be concluded that business is performing excellent. Current
ratio is greater than 1, which means assets are greater than liabilities and quick ratio represents
that 0.75 is liquid for any 1 liability.

4.3.2. For Retail Business

Gross profit margin = (Revenue COGS) / Revenue
= (426,000 325,000) / 426,000
= 0.237
Net profit Margin = (Net profit / Net Sales) * 100
= (61,000 / 426, 000) * 100
= 14.31 %
Current Ratio = Current asset / Current Liability

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= 5070 / 2950
= 1.718
Quick ratio = (current assets inventories) / current liabilities
= (5070 2370) / 2950
= 0.915
From the above analysis of Retail business it can be observed that gross profit margin is
0.237, which means that for every 1 the company will earn 0.23 at the end. From the net profit
margin it can be concluded that business is performing excellent as the value is greater than 10%.
Current ratio is greater than 1, which means assets are greater than liabilities and quick ratio
represents that 0.95 is liquid for any 1 liability.

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References

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help investors predict and interpret significant corporate events. Australian journal of
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Chesbrough, H. (2012). Why companies should have open business models. MIT Sloan
management review, 48(2).
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partnerships. Journal of the European Economic Association, 11(1), 83-111.
Gitman, L., Joehnk, M., & Billingsley, R. (2013). Personal financial planning. Cengage
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Leitmann, G. (Ed.). (2013). Multicriteria decision making and differential games. Springer.
Lin, H., & Paravisini, D. (2013). The effect of financing constraints on risk. Review of finance,
17(1), 229-259.
Lusardi, A., & Mitchell, O. S. (2011). Financial literacy and planning: Implications for
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Norvaiien, R., Stankeviien, J., & Kruinskas, R. (2015). The impact of loan capital on the
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